S&P500 Normalized with M2(twitter.com) |
S&P500 Normalized with M2(twitter.com) |
This chart isn't mind-blowing, it's straight-up meaningless.
[edit] Also note the S&P 500 isn't even a consistent numerator, it's an index whose constituent companies are replaced over time at the whim of a committee, lol. Remember when Tesla got added in 2020, and the Apartment Investment and Management Co. got removed? - and as a peer comment pointed out, this doesn't even include dividends and distributions.
I wouldn't say its completely arbitrary given this has been a common discussion point.
No opinions on whether it has meaning, but wanted to add the relevance.
Iirc, the fed also backstopped bonds and bought some stock
So if M2 growth and the S&P 500 are similar, that means that the S&P 500 is fairly well correlated with the size of the economy. Quelle surprise!
If the economy grows, the amount of money needed to lubricate the economy also grows. If the money supply doesn't grow while the economy does then we'd see significant deflation.
So we want these two measures to be relatively balanced, and they are. Yay!
https://www.multpl.com/inflation-adjusted-s-p-500
You can also note that M2 is correlated basically with inflation in the long run (Rsquared ~0.92)
The error on the part of the twitter user is that he's using nominal values instead of % growth (log-log) values. Something you learn in 101 econometrics.
This is why you don't listen to crypto bros on matters of monetary economics.
S&P 500 gained ~40% since January 2020, and CPI gained ~18%.
Even better would be comparing to the total stock market rather than S&P 500. Using something like DWCF or VTSAX
There's alternatives, and trust me, one of them addresses your gripes.
Unless your complaint is very specific, assume you didn't just intuitively out-think a bunch of PhDs whose job is thinking about this
I didn't notice them. Is there anyone who believes Google or Microsoft are now significantly more useful than in 2003? Does anyone feel like Facebook has gotten more useful in recent years? Apart from compensating for ever slower Electron apps, does the additional CPU power in modern Macs really improve my life? How come VS Code still feels so much slower than Visual Studio 6 on Windows 98 SE?
Maybe it's time to accept the obvious conclusion that new != better when it comes to technology.
dont need any financial astrology or jargon to know this
I would rather have (monetary) deflation when then economy grows. Then the money I save in would increase in purchasing power. If I save in the money described in the quote above, I don't participate in the growth.
> I would rather have (monetary) deflation when then economy grows. Then the money I save in would increase in purchasing power. If I save in the money described in the quote above, I don't participate in the growth.
So you want a risk-free return for doing nothing. Of course, who wouldn't. Elementary school kids want pizza every day for lunch. Why should you participate in the growth of the economy while risking literally nothing, in exchange for literally no input of your own? Just because you got there "first"? That's just "UBI for me, and everyone else can get rekt."
All the worst economic periods in history were deflationary, and if you believe in the Philips curve, then maximum employment and prosperity is achieved at a low, positive rate of inflation.
Your job in the economy is to productively allocate your excess capital. Under your mattress in exchange for positive real return at no risk to you is not a productive allocation. The whole point of inflation is to discourage that behavior. So I'd say it works.
Either way, none of this has anything to do with this silly graph.
- Inflation and money supply are tightly correlated.
- "Inflation is caused when the money supply in an economy grows at faster rate than the economy’s ability to produce goods and services." - St. Louis Fed
https://www.stlouisfed.org/en/education/feducation-video-ser...
> Inflation and money supply are tightly correlated.
Historically, they haven't been. Since 1970 the M2 supply has increased like 36X (7% annualized) but the price of goods is only up 7X (3.6% annualized) -- this includes the inflationary period in the 70s and to the peak in the 2020s just to avoid cherry-picking. [1, 2]
Money supply is how much money is floating around, and inflation is a decrease in the purchasing power of money as measured from prices of a representative basket of goods and services over time.
> "Inflation is caused when the money supply in an economy grows at faster rate than the economy’s ability to produce goods and services." - St. Louis Fed
What they're saying is that when the supply and demand of money are in balance prices should remain relatively consistent (MV = PQ) all else being equal - but all else is not equal. You can't distill the value of money down to one sentence from the St. Louis Fed.
Being the reserve currency and having other world economies dollarized means that there is a ton of external demand for US dollars outside the US economy. That increases supply without touching prices. Taxes are inflationary. Supply shocks are massively inflationary. If we run out of oil and everything doubles in price, that's inflationary - and it happens regardless of money supply. That's just a few random things that are completely left out of the above statement.
Most money issuance in the US doesn't come from the Fed, it happens at retail banks when you take out a loan against fractional reserve, and each dollar is backed by the demand to repay that loan. As economic activity increases, so does the demand for loans, and therefore the supply of money. So generally, within some margin, the money supply tracks the economy thereby satisfying the quote.
The BLS actually publishes a CPI analysis based on a consistent series without adjustments called R-CPI-U-RS. The difference between CPI-U and R-CPI-U-RS is like 0.8% IIRC [1].
By all means, prove yourself wrong. You can dig up some old newspaper ads from the 70s. None of this is something you can't calculate at home.
> That is to say that the detailed level inputs are really good but the end product is manipulated.
All the details, data and weightings are published. Are there some you specifically disagree with?
Citation needed. And for the love of God don't cite Shadowstats lol, which is trivially and obviously wrong.
[1] https://www.bls.gov/cpi/research-series/r-cpi-u-rs-home.htm